Saturday, November 12, 2011

Why is insurance so expensive? Or, where does all of the money go part 2.

I don’t think that anyone will argue that insurance is expensive.  The idea of insuring something is not new; the Chinese understood the concept as much as 4,000 years ago, the Babylonians codified it in 1750BC as part of the Code of Hammurabi, and Benjamin Franklin helped to popularize and standardize property insurance in the 1750s. 

The insurance business has (probably) always had a companion industry – insurance fraud.  It is estimated that over $30 billion dollars are lost every year due to either hard fraud, which is a fabricated claim or a fake injury, or soft fraud, occurring when claims are padded or businesses misrepresent work done to get lower premiums.  All of this costs the average, honest person by the overall rise in premiums to offset the losses.  Now, assuming that every US citizen is paying for their own insurance, this would cost an extra $100 per person per year.  Since we know that not everyone has, or can afford, insurance it is much higher.  Here are six humorous but, poor attempts at fraud brought to you from  Here is an article explaining the different forms of insurance fraud.  If everyone worked together to help stop fraud we would all benefit from lower premiums.

I no longer think that the insurance industry, as a whole, is evil, but I also don’t think that they ignore the opportunity to make the most money possible.  It seems like the different plans are overly complicated with; deductibles, co-pays, out-of-pocket expenses, coinsurance; and different plans for health, vision, dental just to name a few health related items.  It gets even more complicated when you add in life, disability, home, auto, renter, and probably ten more areas that I can’t imagine. 

Another issue I see is that you don’t really have the right choices available when you go to purchase your insurance.  It seems more like a fast-food franchise instead of a nice restaurant, where you have to order a number 2 and you don’t get to add onions or leave off the mayo.  Or, another analogy might be cable packages, which have never made sense to me – why can’t I just get the exact channels I want?  Who makes up those packages?

[/Rant] Another insurance area that I have never understood is the various disaster policies.  It must be horrible to have your home, car, possessions all destroyed by a hurricane.  I have friends and family that were affected by Katrina and Rita, so I know it can be bad.  But, no one forces people to live on the coast, they choose to do so.  It seems unfair, to me, that my insurance rates are increased to help pay for replacing all of those homes and businesses, right where there is likely to be another hurricane in just a few years.  The same thing goes for people living in the flood plain of a major river.  I can see why it is attractive for farmers – the soil is rich BECAUSE it is on a flood plain.  Don’t get me started on people buying mobile homes in Oklahoma! [/Rant]

But what can we do?  Although it is possible to live without insurance it is a huge risk.  A single hospital stay can devastate your finances, the loss of transportation can mean the difference between having a job and not, and losing your home...

Most of the experts suggest that if possible, shopping around for the best deal can save money.  Although this is not as easy for health insurance, it is possible to do for home and auto policies.  Many of the larger companies offer reductions for coverage on home and auto bundled together.  For those people who don’t have health coverage through their employer, you can save a lot by getting exactly the coverage you need based on your current health and lifestyle.  This link has some articles describing what some of your options are.

In the auto insurance world there are more choices, but the buyer needs to know some basics about the kind of coverage they will need.  This WSJ article has some information and links that will help fill in the blanks.  There is more info and some suggestions for lowering your auto insurance expenses in this CBS News article.  If you are interested in finding out how much money you could save every year by NOT owning a car, see this calculator based on Bureau of Labor Statistics data.  Most people need a vehicle so it makes sense to buy one that costs as little to insure as possible.  This Kiplinger article lists the top ten (or bottom ten) choices for 2011.  There is also a link to older cars.

With home insurance costs can also be lowered by a number of factors described in this article from the Insurance Information Institute.

To summarize:
  • Protect yourself and others by reporting fraud
  • If possible, shop around for the best policy for your needs
  • Bundle home and auto insurance
  • Prepare for home or auto purchases with insurance in mind

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